Inheritance Tax

[Annabella92]

Is it wrong to try and avoid inheritance tax? Is inheritance tax itself unfair? Has your family taken any measures to avoid it?

Does this mean that in your country, there is a massive gap between rich and poor, with lots of people living in absolute poverty?

If so, that isn't a model that the UK should follow. We have moved on from that model with the creation of the welfare state.

It would make much more sense if HMRC simply applied some sort of claim to the property for the full IHT amount, which they'd receive directly upon the sale of the property.

I so agree with this. Having to pay it upfront is just bonkers. Where there's a property, they should be able to put a charge on it in the same way as a mortgagor does, so that HMRC get their share automatically.

I don't have a problem with the principle though, and won't be taking any steps to minimise mine. My whole estate is unlikely to exceed 500k, so it won't be a massive amount.

The tax rules around trusts have been repeatedly altered in order to make them less effective a a way to shield from tax. The most recent changes mean, broadly, that if a person living in the UK puts money into a trust for others and then dies while subject to UK IHT, all of the assets in that trust will still be subject to IHT. This reduces their effectiveness yet again, and to a passive extent.

Trusts also have always carried large upfront and ongoing fees for lawyers, accountants and investment managers who profited from helping the very wealthy pass their wealth down the generations without paying IHT.

Sometimes trusts have the very legitimate aim of keeping control of assets away from the beneficiaries who aren’t (yet) competent to manage and use the assets responsibly, for instance in the case of children whose parents leave assets for them in trust, or in the case of people whose personal or health issues mean they will never be capable to manage and use their own assets in a sensible way.

However, I still think that broadly, those tax changes are actually a good thing: there are still too many ways for the very wealthy to avoid taxes. IHT and CGT can both be avoided using various tricks and loopholes. The new budget has closed some of these, but others still remain.

Broadly, people who have way more than enough can still reduce IHT by gifting surplus funds to beneficiaries while they (the giftors) are still alive - if they survive another 7 years, those gifted amounts will not be subject to IHT. Regular gifts out of ordinary income can also be immediately exempt from IHT. And, it is still true that people who have money and assets above IHT the nil-rate band, but not enough to give large amounts away, are the most likely to end up having their estates chargeable to IHT when they pass away.

This is not advice, rather an expression of my own opinions combined with a bit of general information about the UK tax code.

Your maths are slightly off here. The combined tax is high but it is not quite 80%.

100 of pre tax income will turn into 60 after income tax. If that is unspent and left for heirs, the tax on that is 40% of 60, leaving 36 to the heirs. So the tax rate is 64%.

64% is still a lot. But, IHT is in effect a tax on surplus, unneeded and ungifted income where the earner socks it away for themselves “just in case” and then dies without needing it. If they had gifted that amount sooner and then survived 7 years, the IHT would never have gotten paid on that amount.

At one level the 64% tax still feels unfair. At another level, the person receiving the 36 never earned it, and (where it is the children inheriting which is the most common) that receipient only receives it from having the good fortune to be born to parents with extra money.

HNRTT but is it likely 40% has already been paid in tax? Gains in residential property if a primary residence won't and these will represent much of many estates. Gains on investments won't depending in how they are held (in ISAs or other vehicles). It feels simplistic to think the principal will have been earned income fully subject to income tax then hidden under the bed to sit waiting for death. At the risk of being wrong as I HNRTT, I suppose that complexity makes for a lower aggregate tax rate 'in reality' though a less extreme headline.

By whalloped, what do you think would be the aggregate IHT cut, after trusts, transfers that happened more than seven years before death and so on, would it be around 5-10% in reality on average? I expect there'll be some changes resulting from the changes to the various reliefs in the last budget that might be keeping people busy.

The issue is the hypocrisy though. You are encouraged to save for your old age, to save the state money. Someone up thread said "just in case", well yes, that's the point. Then if you have the misfortune to live a long and healthy life the government screws you over when you die. Sorry I wasn't a burden, shall I kill myself now?

As will people like myself, divorced so getting less IHT allowance than a widow or widower. I do not live in the SE but am still apparently very rich!

The value frame "save for your old age to save the state money" implies that the state has a responsibility to provide material comfort for all old people, and individuals who save for themselves are primarily doing a favour for the state. But the state actually means "other people in general". So that value frame really says "I am entitled to receive material comfort in my old age that will get paid for other people in general." That is not hypocrisy but I think it is a sense of entitlement that could be fairly described as unrealistic and unhealthy.

Another way to frame it is "I choose to save money for my own old age so that I will be well-provided for even if other people in general, ie the state, are unwilling or unable to provide the level of comfort that I wish to receive."

Then on the whole IHT thing, people who are fortunate enough live a long and healthy life are actually more likely to spend down their more of their money. The strongest argument against IHT is that it mainly affects the estate of people who are unlucky enough to die relatively young before they enjoy their accumulated wealth. BUT, those people are dead anyway, and hence unlucky, so letting them leave more money to their heirs by removing IHT would not help them at all, it just makes their heirs even more lucky that they have died young and relatively wealthy. Conversely, a properly funded NHS that can help reduce the number of people who die prematurely would actually increase fairness - even if part of the funding comes from increasing the amount of IHT collected.

@YankeeDad

IHT and CGT can both be avoided using various tricks and loopholes.

Point of order. They're not "tricks and loopholes". They're reliefs and exemptions passed by Parliament to drive certain behaviours. They do exactly what they say on the tin, as the legislators envisaged at that time when they were introduced.

It's a bit like saying people who've managed to accumulate a million pounds in an ISA are using "tricks and loopholes". They're not either. Nor is saving in a personal pension scheme.

No, sorry I fundamentally disagree with you.

'Save for your old age to save the state money' is just a factual statement. As things stand, the state is obligated to pay for the care for the old and elderly if they don't have the funds to pay for this themselves. There are countless cases where the state is funding exactly the same care as someone who is paying with their own money. The person that saved for their old age is literally relieving a financial burden from the state and this is why saving should be incentivised and encouraged. Care is cripplingly expensive and people should be encouraged to accept that this is a cost that they should look to meet as part of being a self sufficient, self sustaining person.

The NHS would receive more funding if more people were funding their care bills in old age because they had sufficient assets and money. The incentive to retain assets would be immeasurably larger if there was no IHT and people could pass on anything that's left in their estate to their loved ones. If we have a punitive IHT regime then there is absolutely no incentive to save beyond whatever threshold is in place and people are likely to be much more frivolous with their spending, reasoning that the state can pickup the care bill anywa.

Philosophically though this comes down to whether or not you think an individual has the right to ‘own‘ things. If so, IHT makes no sense.

Things like CGT are taxes on gains made they’re not the same thing as taxing assets when they are passed to someone else.

@twomanyfrogsinabox the correction by @YankeeDad is still a massive overstating of how much tax is being paid.

Just being in the 40% tax bracket doesn't mean you've paid 40% on everything. Comparing with those a bit under the 40% bracket on the median wage of £37,430 whose overall tax rate is only 13% (because the first £12,570 is tax free), someone earning twice the median wage will be paying about 23% of their income as income tax and someone earning three times the median is paying 29% of their income in income tax. You have to be really ridiculously rich for the zero-rate and lower-rate sections to become irrelevant.

Meanwhile the vast majority of almost all reasonable sized homes is free of IHT in most cases - you are only paying IHT on the excess OVER £1,000,000 (for any estate from the 2nd to die from a couple) so even if you are wealthy enough to be bequeathing a £2,000,000 estate you are only actually paying 20% of the value in tax.

So replace that 64% calculated above with more like 43% as the aggregate of these values of 29% income tax and 20% IHT which are more realistic even for the very very wealthy. Obviously the super-rich will creep up higher than this but moaning that actually it's worse for you because actually your house is worth £3million is not going to get you that much sympathy. (especially as it was probably bought 40 years ago for less than a third of that and that value increase has never been taxed)

In any fair tax system it is obvious that the percentages should go up gradually as you go up the wealth scale so that for any two people, where person A is wealthier than person B, person A should be paying a higher percentage of their money than person B but should still be left with more money post-tax than person B. This is successfully achieved with progressive tax systems that have thresholds where you pay a percentage of what exceeds the threshold. Neither income tax nor inheritance tax does this unfairly or unreasonably.

Nothing wrong with minimising your tax within the confines of the law.

Agree wholeheartedly with IHT as it stands.

I think your assertion that any 'fair' tax system should obviously work a certain way is completely flawed and disingenuous. Fairness is completely subjective and even if you accept that a progressive system is best, there are many different ways to implement this and different rates and thresholds that can be applied.

I think IHT is deeply flawed in premise and application. It basically means that people never really own their own assets and the state always has a potential claim to any assets that you have bought paying Stamp Duty/VAT with already taxed income. If you win the lottery and want to give away large sums of money in yours 20s, there is currently a chance that if this isn't done in the correct legal way then the state come after your estate when you die in your 80s. Any sane person can see that this is madness!

The money grab has to stop somewhere! I also think setting arbitrary national thresholds makes the whole system intrinsically unfair. A £1 million property in London is very different to a £1 million property in some areas of the North and the beneficiaries buying power with their inheritance is likely to be very different too. It isn't progressive if it isn't sensitive to this! The same goes with income tax too.

Some good points about IHT only kicking in over the threshold so the actual cost isn't that high.

I struggle with the logic around the inconsistent treatment of couples for tax.

We get individual tax allowances for income tax.
We don't really get married couple allowances.
Child benefit is determined by the highest earner between parents (not necessarily married).
IHT is zero rated between spouses.

So separate for the child benefit years and marry before you die! (Joke)

IHT isn't so much of a problem with "cash" assets like investments, pension funds, cash in the bank, etc., as funds are liquid and can be realised to pay the IHT before the residue is distributed to the beneficiaries of the will.

The problem, especially with businesses and farms, is that there's often no liquid cash to pay the IHT bill, so the executors have to borrow money or sell assets to pay the IHT. That's exactly one of the reasons the reliefs/exemptions for business and farm assets was introduced in the first place.

A typical small family farm may no longer be viable if parts of it have to be sold off to pay the IHT when it's passed down a generation. Likewise it may not be viable if it has to borrow monies at relatively high interest rates to pay the IHT (business loan interest rates are higher than residential mortgages!).

Inheritance tax is arguably the fairest tax of all. Why should inherited wealth come tax free but money earned by working in Tesco is subject to tax and NI ?

Your friend gives you £100 for your birthday. Along comes a tax man, I’ll have 40% of that back please. Is that okay with you?

A more accurate analogy is if the friend gives you £325,000.

Either your money is yours or it isn’t. Are you saying that you would be happy to give back 40% of that hundred pounds

Maybe I should just take 40% out of your bank account because I’m a little bit short in providing public services this year.

Not unfair over a certain threshold and yes our family have taken steps to avoid IHT.

Gifts are exempt from IHT up to £3000 per year. you must have very rich and generous friends .

Answer the question. Should the state be able to take 40% of your hundred pounds